Crowdfunding is when a lot of people give small amounts of money to help fund a project or idea. It’s like when you and your friends chip in to buy a gift for someone’s birthday, except it’s online, and you’re helping someone make their idea a reality.
So let’s say someone has an idea for a new invention or a creative project, but they don’t have all the money they need to make it happen. They can create a crowdfunding campaign on a website, like Kickstarter or GoFundMe, where they explain their idea and ask people to contribute money.
People who like the idea can then choose to donate small amounts of money to the campaign. If enough people donate and the campaign reaches its funding goal, the person who created the campaign can use the money to make their idea a reality. And if they don’t reach their goal, the money is usually returned to the people who donated.
Crowdfunding is a way for regular people to support cool ideas and projects that they believe in, and for creators to get the funding they need to make their dreams come true.
In many countries, including the United States, crowdfunding is regulated by laws and regulations designed to protect investors and prevent fraud. These laws can vary depending on the type of crowdfunding and the amount of money being raised.
In the US, for example, there are several types of crowdfunding regulated by the Securities and Exchange Commission (SEC), including:
- Donation-based crowdfunding: This is where people donate money to a cause or project without receiving anything in return. This type of crowdfunding is generally not regulated by the SEC, but there may be state-level regulations that apply.
- Reward-based crowdfunding: This is where people contribute money in exchange for a reward, such as a product or service. This type of crowdfunding is also generally not regulated by the SEC, but the campaign must comply with consumer protection laws and regulations.
- Equity-based crowdfunding: This is where people invest money in a company or project in exchange for a share of the ownership or future profits. This type of crowdfunding is regulated by the SEC under the JOBS Act, which outlines specific requirements for how companies can raise money from non-accredited investors.
In addition to these federal regulations, there may be state-level regulations and laws that apply to crowdfunding campaigns, such as registration and disclosure requirements.
Overall, the legal and regulatory aspects of crowdfunding are important to ensure that investors are protected and that campaigns are transparent and honest about their goals and risks. If you’re thinking about creating or investing in a crowdfunding campaign, it’s important to do your research and understand the applicable laws and regulations.
This page was last updated on February 14, 2023.